Salton's new wares try to punch up sales

George Foreman's grills remain hot sellers, but they may not be able to carry the firm's heavy debt load or offset customer Kmart's woes.

January 18, 2002|By Ameet Sachdev, Tribune staff reporter.

Salton Inc. introduced so many new products at the 2002 International Housewares Show that Chief Executive Leon Dreimann kept a cheat sheet in his jacket pocket to keep track of them.

The kitchen appliance-maker displayed more than 150 new products, from a roasting machine to a juicer just for lemonade to a portable grill, at the three-day trade show at McCormick Place that ended Tuesday. Free samples of grilled portobello mushrooms, fruit smoothies and roasted chicken made the exhibit a popular destination.

Dreimann is banking on the new gizmos to build on the momentum of better-than-expected holiday sales and lift the fortunes of the Lake Forest-based company. Before the crucial Christmas period, Salton suffered four consecutive quarterly declines in sales and profits, as the economic downturn took its toll on the once hot-growth company.

But look beyond the shiny kitchen appliances on display and a number of weaknesses are exposed that could derail Dreimann's turnaround efforts.

Part of the problem is debt. Salton labors under a huge debt load built over the years as the firm borrowed money to buy business after business. Long-term debt stands close to $365 million, and interest costs ate 50 cents of every dollar of operating profit in the quarter ended Sept. 29.

Another problem is the potential disruption if Kmart Corp. declares bankruptcy. The discount merchant is Salton's second-largest customer, representing 11 percent of sales, or $87.1 million.

The firm also relies heavily on one product line: George Foreman grills, which represents 42 percent of its sales. While the line has had surprising staying power, marketing experts wonder how far Salton can stretch the brand.

The challenges, along with the uncertain timing of an economic recovery, give Dreimann reason to temper his enthusiasm. "Will we limit our credit risks during this time? Yes, we will," he said during an interview at the housewares show.

Nevertheless, the 53-year-old native of Latvia predicts sales will grow in fiscal 2002 after falling the year before for the first time in several years. Still, the explosive growth of recent years when annual sales sometimes increased at a more-than-60-percent clip, driven by Foreman products and acquisitions, is a thing of the past.

Salton's revenue fell 5.4 percent to $792 million in the fiscal year ended June 30, as the weakening economy hurt sales of small appliances. Profits were shredded by 50 percent, as retailers stocked more lower-price appliances instead of higher-margin grills and juicers to drive store traffic. The shift intensified in Salton's fiscal 2002 first quarter, with net income tumbling 66 percent on a 4.3 percent decline in revenue.

Going into the holiday quarter, Dreimann was nervous. Small appliances took it on the chin during the July-September quarter: Overall sales fell 2.5 percent, according to NPD Intelect, a Port Washington, N.Y., market-research firm.

But he received an unexpected Christmas present: Foreman products staged a comeback after sales had tapered off the previous three quarters. Fueled by Foreman, Dreimann said he expects total company sales in the fiscal second quarter to meet previously announced forecasts of $250 million to $275 million, roughly on par with the year-earlier period. Results are expected Feb. 8.

A knockout in the U.K.

Sales of Foreman grills were aided by the introduction of the product in England in late November. Foreman traveled to Britain during Thanksgiving to help with the launch and media campaign. The former heavyweight champ catered to British tastes by demonstrating the grill using fish and vegetables instead of hamburgers.

The company wants to build off the Foreman launch by introducing its other appliances, like breadmakers and juicers, to a British audience and eventually to other European consumers.

In the U.S., Salton continues to extend the Foreman brand. It unveiled a portable grill that uses a one-pound propane canister, which sells for $99.99, as well as a roaster for chicken, beef and lamb.

The development of Foreman products is key to Salton's future, but "how far can you push the George Foreman name?" said A.J. Riedel of Riedel Marketing Group, a Phoenix-based marketing firm that specializes in housewares. "That's the marketer's nightmare."

Dreimann is trying to prove to critics that Salton is more than a one-trick pony. In recent years, the company has acquired the trademarks to Stiffel lamps and licensed dinnerware under the Calvin Klein label.

"If we can deliver on one category, then retailers are very happy to deal with us in other categories," he said.

Debt may hinder buys

But Salton's acquisition streak may be interrupted if it doesn't rein in its debt with its stock price so low, financial analysts said. Shares are down 69 percent from their peak two years ago, and closed Thursday at $18.37, down 37 cents.

The company addressed some balance sheet concerns in October by renegotiating its loan agreements to ease some of the banks' financial guidelines.

"While there are no pending liquidity issues, I would be more comfortable with lower debt," said John Baugh, an analyst at Wachovia Securities.

Dreimann doesn't seem overly worried. Reducing debt is not a priority because its acquisitions have produced enough cash to cover the interest payments, he said.

He would rather tout Salton's new products, such as the Foreman Lean Mean Contact Roasting Machine, which will sell for $59.99. He walks over to the Foreman exhibit and lifts the cover of the machine where two small chickens are cooking.

"It's cooking from both sides," Dreimann said. "Look, you can even bake a cake in it."